Proving once again why the Wall Street Journal should be required reading for all good lefties, today the paper reports on yet another way corporate America has found to screw the wage slaves among us. As the Journal explains, companies are using our pension funds to finance lavish executive perks:
At a time when scores of companies are freezing pensions for their workers, some are quietly converting their pension plans into resources to finance their executives’ retirement benefits and pay.
In recent years, companies from Intel Corp. to CenturyTel Inc. collectively have moved hundreds of millions of dollars of obligations for executive benefits into rank-and-file pension plans. This lets companies capture tax breaks intended for pensions of regular workers and use them to pay for executives’ supplemental benefits and compensation.
What’s the problem with this? Well, there are basically two of them: a) it’s illegal, and b) it causes serious harm to ordinary workers:
A close examination by The Wall Street Journal shows how it works and reveals that the maneuver, besides being a dubious use of tax law, risks harming regular workers. It can drain assets from pension plans and make them more likely to fail. Now, with the current bear market in stocks weakening many pension plans, this practice could put more in jeopardy.
Worse, your tax dollars, and mine, are subsidizing the perks for these already extravagantly compensated execs:
Hat tip to reader Jack for this link to CPA Journal reading.
Normally, companies can deduct the cost of deferred comp only when they actually pay it, often many years after the obligation is incurred. But Intel’s contribution to the pension plan was deductible immediately. Its tax saving: $65 million in the first year. In other words, taxpayers helped finance Intel’s executive compensation.
[. . .]
. . . [A] majority of the tax-advantaged assets in Intel’s pension plan are dedicated not to providing pensions for the rank and file but to paying deferred compensation of the company’s most highly paid employees, roughly 4% of the work force.
On the Hook
And taxpayers are on the hook in other ways. When deferred executive salaries and bonuses are part of a pension plan, they can be rolled over into an Individual Retirement Account — another tax-advantaged vehicle.
Troublingly, this reverse Robin Hood strategy of raiding the pension funds of ordinary workers and handing over the loot to the most highly paid executives has for the most part been carried out in secrecy. Often, the ordinary employees potentially getting screwed out of their pensions have no idea what’s going on — and the bosses and their bottom-feeding consultant aparatchiks take great pains to keep it that way:
Generally, only the executives are aware this is being done. Benefits consultants have advised companies to keep quiet to avoid an employee backlash. In material prepared for employers, Robert Schmidt, a consulting actuary with Milliman Inc., said that to “minimize this problem” of employee relations, companies should draw up a memo describing the transfer of supplemental executive benefits to the pension plan and give it “only to employees who are eligible.”
Ya gotta love the weasel words there — “minimize this problem” of “employee relations,” indeed!
Mucking with employee pensions in this way is of dubious legality, but usually the understaffed, overworked regulators have no idea it is even going on:
With too little staffing to check the dozens of pages of actuaries’ calculations, the IRS generally accepts the companies’ assurances that their pension plans pass the discrimination tests, the official said.
Of course, there is something our elected officials can do about it:
To halt the practice, Congress would have to end the flexibility that companies now have in meeting the IRS nondiscrimination tests.
Does Congress have the huevos do the right thing, and thoroughly investigate — and regulate! — this and many other dubious corporate practices and financing schemes that have taken hold over the past couple of decades? Would President Obama’s SEC and Justice Department have the backbone to enforce the law by going after the corporate crooks and meting out appropriately stiff punishments to the offenders?
I wish I could be more confident that the answer to those two questions is, “Hell to the yeah!”
*H/T: Sir Charles